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Charts I’m Watching: Oct 2, 2012

We remain long from yesterday at 1442, and appear likely to hit the lower end of our initial target of 1452-1456 around the opening bell. We are entering dangerous territory at 1450, and tight stops are a great idea. This could easily be a pop and drop, so I’ll use tight following stops on the way up.

Here’s the potential problem. The dollar is presenting two legitimate channels. If the purple one holds, SPX’s spurt this morning will not last. If we’re working on reaching the red lower bound, then DX should fall to 79.598 or even 79.515 and all is well in short-land.

I’ll start with a stop of 1450 and work from there.

UPDATE: 9:40 AM

Got stopped out within a minute of posting that. Gone to cash for the moment.

Here’s the other thing I saw that concerned me. Right after the opening, RSI was pushing that solid white trend line visible here on the 15-min chart.

And, here on the 60-min chart…

Meanwhile, EURUSD is bumping up against resistance on its 60-min chart.

And, the dollar RSI had tagged important support at two lower channel lines.

UPDATE: 10:10 AM

SPX gave up all its gains and is essentially flat on the day. I remain in cash, waiting for a clearer sign. Here’s an update on that 60-min RSI chart.

We broke the initial (purple) TL, and found support at the yellow. We then had a back test of the purple, followed by a drop back to yellow — which as of a few minutes ago, was also in danger of being broken. A break could signal a return to the 1430s.

UPDATE: 11:30 AM

I’m taking advantage of the lull to finish that channel study I started yesterday. I’ll post it as soon as possible, as I believe it provides some great info on the direction over the next several weeks.

UPDATE: 11:45 AM

Just got a crack in the pink channel bottom, and a break of all the RSI TL’s discussed above. Look for a bounce/back test off the purple channel bottom around 1439.50. I’ll look to play the back test for a potential short.

DX just tagged the bottom of the red channel, and immediately bounced back to where it was. Here’s the 5-min chart, showing very good support off that channel line.

And, the RSI close-up.

UPDATE: 12:12 PM

Scratching my head here… the SPX 15-min RSI shows equally strong potential in both directions. I’m going to try a small long here at 1441 with tight stops, say 1439.80ish, in the belief that the purple channel will hold. It it breaks, I’m short. Be aware that this might be nothing more than a back-test of the broken pink channel.

If it’s only a back-test, it should run out of steam shy of 1445.

UPDATE: 12:45 PM

The DX RSI is back to testing a channel midline (purple, dashed), but in the midst of a falling wedge that matches that of the price index. The red channel correlates with the price channel we’ve been following since the 14th, and shows the rising trend.

The small purple channel shows what might happen if DX runs into a brick wall at that yellow mid-line.

Recall that the dollar completed a Bat Pattern on the 14th at the bottom of a long, well-developed channel. It has since retraced only a little past the .707. If the red channel since the 14th is the first wave up after that Bat Pattern completion, we should get a corrective wave.

If so, we might get one more push higher within the latest move down — just to scare equity longs, and then the channel will break down — with a DX push to at least 79.515 and potentially lower.

Let’s back out and review the big picture. The dollar is caught between two competing huge, long-term channels. The purple is falling; the red is rising. In 2008, DX got very close to its 1.272 at 68.947. It might still be trying to get there, in which case the purple pattern should dominate.

I tend to think the downside is done, and we’re working higher – in which case the red pattern should dominate. There was a time when the euro was viewed as the dollar killer. I own a couple of books advising folks to sell all their dollar assets and put them in euros.

More in a few…

UPDATE: 1:45 PM

DX just tagged the upper bound of a potential falling channel (purple) that could take it down below the red channel if my above theory were to play out. If the channel is close to correct, this rise should peter out at the red channel line just above around 79.78.

If this should happen, look for a nice rebound for stocks, perhaps as high as the red channel top at 1454ish.

The other obvious possibility is that this morning’s plunge — which has Point B written all over it — could help set up a Butterfly lower.

If so, there’s a good possibility (but, not necessary) that DX would move higher in search of a Point C first. The red channel midline — where it intersects with the larger falling red channel — is an area that intrigues me. It would occur around 3am EDT right at 80.

If you’re long, let me remind you to use stops. This is a very dicey situation.

Another RW on DX?

UPDATE: 2:30 PM

SPX just spiked lower, tagging the red channel mid-line and rebounding. I’m inclined to give it some leeway here, and will hold on to my longs just a little longer, maybe down to 1438 or so. The midline will be my guide.

Potential falling wedge on the 15-min chart to match the rising wedge on DX?

If it plays out, that should be about it for the downside. DX at 79.825 and SPX at 1439.01.